Pharmacy cash flow is still struggling even though the DIR Fee Apocalypse is over. Read on to get 7 practical tips to improve your pharmacy’s cash flow.
Pharmacy cash flow is the heartbeat of your business—it keeps the lights on, the shelves stocked, and your team paid. However, in today’s pharmacy landscape, cash flow challenges are more pressing than ever. For example, shrinking reimbursements, the aftermath of the DIR Fee Apocalypse, and rising costs make it harder for independent pharmacy owners like you to keep your pharmacy financially healthy.
So, today, let’s explore seven actionable steps you can deploy to resuscitate your pharmacy’s cash flow.
What Is Cash Flow?
Simply put, cash flow is the movement of money in and out of your business. In fact, it’s not the same as profit, which is a theoretical number on your financial statements. Cash flow represents the money you have on hand to pay bills, invest in growth, and keep operations running.
Here’s a quick example:
If you sell a prescription for $100 and pay $80 to purchase it, you have a $20 profit. If the prescription sits in will call for 2 weeks, you are still out the $80 cash, even though you ‘made’ $20 profit. Cash flow is all about timing—when money comes in and when it goes out.
Why Is Cash Flow Important?
Think of profit as water and cash flow as oxygen for your pharmacy. While both are necessary, you can survive longer without water than you can without oxygen. This is why more pharmacies close down due to a lack of cash flow, not profit. Without enough pharmacy cash flow, you can’t pay your team, purchase inventory, or keep the doors open.
Poor pharmacy cash flow is the #1 cause of pharmacy owners’ stress. However, by taking steps to manage and improve cash flow, you can avoid cash crunches and set your pharmacy up for long-term success.
The 7 Steps to Improve Your Cash Flow
Below are seven practical strategies to improve cash flow in your pharmacy. Whether you implement one or all of them, these tips can help create financial stability and breathing room to focus on growth.
1. Decrease inventory
Your inventory is the largest black hole for your cash. Every bottle on your shelf represents money that’s tied up and not available to pay bills. If your pharmacy inventory is overstocked, then you are likely feeling the stress of low cash flow.
While a complete inventory management system is more than a few sentences, here are some quick tips to help you get started.
– Order less: Slowly decrease your inventory by aiming to always order less than your daily cost of goods sold (COGS). For example, if your daily COGS is $7,000, aim to place an order for $6,900 or less.
– Return overstock: Know your wholesaler’s return policy and be sure to regularly identify items that should be returned.
– Sell non-returnable stock: Use platforms like Match RX to sell non-returnable items and convert them back into cash.
– Use software like Datarthym or your DSCSA solution to help you better maintain your inventory.
Quick Tip: For most pharmacy owners, getting your inventory reduced and maintaining an inventory turns of at least 24 will significantly reduce pharmacy cash flow problems.
2. Negotiate Longer Payment Terms
Since your pharmacy cash flow is all about timing, the longer you can hold onto your cash before paying bills, the better your cash flow will be.
Here’s how to get longer payment terms:
– Ask vendors to extend due dates: Many might be willing to adjust billing cycles if you ask.
– Maximize grace periods: If a bill isn’t late until the 25th, don’t pay it on the 5th.
– Use secondary wholesalers: Companies like Real Value Products and RxCherryPick offer 30- or 45-day payment terms. Consequently, this gives you more flexibility and a HUGE boost to your pharmacy’s cash flow.
3. Restructure Debt
If high-interest loans or large payments are draining your cash flow, it might be time to restructure your debt. Moreover refinancing or consolidating loans can reduce monthly payments and free up cash.
Here’s how to get started:
– First, explore SBA loans: These loans often have lower interest rates and fees.
– Next, consider alternative lenders: Companies like Lightstream offer unsecured loans with quick approvals.
Ultimately, even a modest reduction in monthly debt payments can make a big difference to your cash flow.
4. Reduce Expenses
Every dollar saved is a dollar earned. As a result, reducing unnecessary expenses can have an immediate impact on your cash flow.
Start with these steps:
– Audit your expenses: Review your profit-and-loss statement and ask yourself: Is this expense necessary? Is it making me money? Is it giving me back time?
– Control payroll: Keep payroll below 13% of revenue, with a goal of less than 11% for optimal efficiency.
– Involve employees: Encourage your team to adopt a cost-saving mindset. For example, switch from paperclips to staples or buy generic supplies instead of name brands.
– Switch vendors: It can be worth it to change vendors for some services. An example is payroll processing. Moving to Gusto can save hundreds of dollars a month over more expensive options.
5. Collect More Payments
If you’re not collecting every dollar you’re owed, your cash flow will suffer. Here are ways to ensure you’re getting paid:
– First, reconcile third-party claims: Regularly audit to catch missed payments or discrepancies.
– Additionally, pass on credit card fees: Consider charging customers for credit card transaction fees. Many pharmacies have moved to this model with very few issues.
– Finally, set up automatic payments: Require credit cards on file for house accounts to reduce delays in collecting payments.
6. Increase Profits
While profit and cash flow are different, increasing your profits can make it a lot easier to have better pharmacy cash flow.
Here are a few strategies to boost profits:
– Sell high-margin OTC items: Products like AMS Nitric Oxide, Nudora, Vinco, or Frog Fuel.
– Expand cash-based services: Consider adding point-of-care testing, functional medicine consultations, or weight loss programs.
– Direct bill workers’ compensation claims: Services like StreamCare will do all the work and bypass the dreadful PBMs so you can significantly boost your pharmacy’s profits.
7. Leverage Other People’s Money
Sometimes, the best way to improve your pharmacy cash flow is by using other people’s money.
Here are two tools to consider:
– Lines of credit: Secure a line of credit before you need it to ensure funds are available for emergencies. We recommend Carlos Weil from Capital Solutions Bancorp (Carlos Weil – CEO Cell 239-822-9906)
– Credit cards: Cards like the Plum Amex offer continuous 0% interest for 60 days, providing extra time to pay bills without interest charges.
Using credit wisely can provide flexibility during tight cash flow periods.
The Most Critical KPIs for Pharmacy Cash Flow
Tracking your Key Performance Indicators (KPIs) is critical for managing cash flow and profitability. To get started, focus on these three:
1. Inventory Turns: Aim for at least 24 turns per year to keep cash flowing.
2. Payroll Ratio: Keep payroll costs below 13% of revenue, with a goal of 11% or lower.
3. Expense Ratio: Ensure total expenses, including payroll, don’t exceed 19% of revenue.
Action Step: Work with your bookkeeper or accountant to calculate and monitor these KPIs monthly.
Start Improving Your Cash Flow Today
Improving cash flow doesn’t have to be overwhelming. Start small—pick one or two strategies and implement them this month. Whether you reduce inventory, negotiate better payment terms, or boost profits, every step you take will make a difference.
Once your cash flow is under control, you’ll have the breathing room to focus on growing your pharmacy and serving your community.
Need Help?
At DiversifyRx, we specialize in helping independent pharmacies thrive. Furthermore, from inventory management to cash flow strategies, we provide the tools and support you need to succeed. Join our membership today HERE and let us help you build a more profitable and sustainable pharmacy business.
